Forget about Greece – and even Portugal. The European and UK economies would just about survive their default. The real nightmare would be if Italy or Spain were also to hit the rocks. The impact would be so huge – and the amount of debt written off so large – that it would guarantee a sharp Europe-wide recession, with the UK badly hit. It would be a case of 2008-9 all over again, albeit at a time when governments are already maxed out when it comes to their borrowing capacity.
Italy’s national output is almost the same size as the UK’s with a GDP in 2010 of $2 trillion. Spain’s, while smaller at $1.4 trillion, remains massive. Both are central to the anti-democratic project to build an ever more centralised, politically unified Europe; Italy especially so given that it is a founder member and signatory to the Treaty of Rome. If either of those were to quit the single currency – let alone leave the EU – the whole project would implode.
As the Centre for Economics and Business Research points out, the problems facing both economies are different. Italy has a (relatively) small budget deficit of 4.5 per cent of GDP in 2010, but a large debt of 129 per cent of GDP. Property debt isn’t a major problem. But Prime Minister Silvio Berlusconi has been a disaster: the economy has barely grown, year after year; high costs and a failure to boost productivity have made the country’s exports deeply uncompetitive; and the entire political establishment lacks the willpower to do anything about it. There is simply no realistic way that growth can be kick-started, something that is also true of Greece.
Spain has been more successful. But it should have never have joined the single currency. Its decision to do so meant that its interest rates tumbled (when it ditched the peseta and adopted the much more credible, low inflation euro) triggering a massive house price bubble and a construction boom, leaving 1.5m unsold properties. Its national debt, while too high at 73 per cent of GDP, isn’t yet at crisis level – the issue is the deficit, which hit 9.2 per cent of GDP in 2010. This is pushing up the national debt at a dangerously fast rate, just like in the UK, Greece and the US. The biggest problem of all, however, is that banks extended large loans against property – and the house price crash means that the financial system could be facing massive losses. Fortunately, Spanish banks engaged in pro-cyclical provisioning, so they do have reserves upon which to draw. External observers don’t have a good grasp of the real situation, however.
There are two options for Spain and Italy. The first is to tighten their belts, German-style, cut costs, pay the debt back and price themselves back into competitiveness. The CEBR calculates that this would mean a further cut in living standards of 13 per cent for Spain and 19 per cent for Italy. There is a chance that Spain might eventually do this – but no hope for Italy. The second option is to default or quit the euro – or both. Those of us who opposed the euro in the late 1990s and who warned that it would end in tears have been vindicated – tragically, however, it looks as if the whole world will soon be paying a terrible price for the megalomania of Europe’s economically illiterate establishment.
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